Oil slump is hitting other sectors

Oil prices are plummeting to levels they haven’t seen since 2003. Add in the fact that BP Oil announced it plans to cut more than 4,000 jobs over the next two years and things are looking down for the oil industry.

An oil well is viewed near a construction site for homes on February 5, 2015 in Midland, Texas.(Photo: Spencer Platt, Getty Images)

The unrelenting slide in oil prices is rippling to the broader economy as the industry's downturn squeezes sectors as diverse as airlines and restaurants, steelmakers and law firms.

The U.S. crude benchmark price rose 4 cents Wednesday to close at $30.48 a barrel but has fallen about 18% so far this year after plummeting in 2015 and is close to 12-year lows. The crash has led oil producers to sharply scale back drilling and cut jobs. The bloodletting has translated into hundreds of thousands of payroll losses across the labor market and cut about a half a percentage point off economic growth the past year, according to Moody's Analytics.

United Airlines said this week it expects lower passenger revenue in the fourth quarter because of reduced bookings by Texas oil executives -- who often travel first class -- and the impact of the Paris terror attacks, among other factors.

KB Homes, the giant builder, dialed back construction in the Houston area last year because of oil’s slide. The company “decided let’s take some chips off the table until things stabilize,” CEO Jeffrey Metzger told analysts this week.

While much of the fallout is concentrated in Texas, North Dakota and other oil-producing states, it’s also affecting manufacturers and service firms across the country. The oil and gas industry announced 204,000 layoffs during the past 12 months, according to Continental Resources, an oil company that tracks the figure.

On net, after factoring in hiring, the sector lost 114,000 jobs the past year, but the human toll doesn't stop there. Every lost oil and gas job leads to an additional 3.43 jobs cut in other sectors, Moody’s estimates. That’s a relatively large multiplier effect because the energy industry is rife with well-paying jobs and big-spending employees, says Moody’s economist Chris Lafakis. About 37% of those positions are directly affected by the energy industry, such as those in steel production and railcars for oil transportation. Another 63% are due to laid-off employees’ reduced spending in sectors such as hotels, retail and healthcare.

That means the 114,000 job losses wiped out an additional 391,000 jobs in other sectors last year and sliced economic growth to about 2.1% from 2.6%. Manufacturers, for example, announced 37,221 layoffs the past 12 months, Continental figures show.

“Energy has been a substantial drag on the job market,” Lafakis says.

Potentially adding to the industry's troubles, the Federal Reserve raised interest rates last month for the first time in nearly a decade and additional hikes are expected this year, moves that are likely to further strengthen the dollar. Since oil is traded in dollars, that could put even more downward pressure on crude prices.

The Lone Star State has borne a Texas-size share of the pain. “Almost all businesses in this region have been affected,” says Dustin O’Quinn, a board member of the Houston Metropolitan Chamber of Commerce. The University of Houston estimates the area added 15,000 jobs last year, down from 103,600 in 2014, because of the oil slump.

Traffic at Mezza Grill in Houston has fallen 20% to 30% over the past year and patrons are ordering less expensive fare, says owner Stephanie Tibi.

"People are cutting back because they were laid off or are anticipating being laid off," she says. Tibi says she's been forced to pare her staff to 22 from 40 a year ago

San Antonio-based law firm Mazurek Alford & Holliday, which does work for energy companies, is down to about 10 lawyers after cutting its staff in half last year, says partner Benjamin Holliday. With oil prices still plunging, the firm is considering diversifying into other niches, such as real estate development law.

“Seeing how fast things currently are changing, we’re taking it seriously,” he says.

Manufacturers across the country also have been rocked. Shipments of steel in the U.S. -- used to make oil and gas pipelines -- were down 11.4% through the first 11 months of 2015 and the industry announced more than 12,000 layoffs during the past year, according to the American Steel and Iron Institute. The struggles stem from both the oil industry’s woes and a worldwide glut in steel capacity.

Meanwhile, the U.S. and Canadian revenue of plastics maker A. Schulman fell short of targets last quarter “due to the significant downturns in the oil and gas markets,” CEO Bernard Rzepka told analysts this week. And net income for UniFirst, which makes uniforms for oilfield and other workers, was down 4.1% last quarter, largely because of oil job cuts, company executives told analysts.

Despite the downturn, the crash in oil prices still has been a net benefit for the economy because cheap gasoline has bolstered consumer spending, which accounts for more than two-thirds of economic activity, Lafakis says. The Labor Department reported last week that employers added 2.7 million jobs last year, the second strongest year for job growth since 1999, behind only 2014.